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IMF issues austerity warning

Monday, 30 January 2012 | 00:00
Inappropriate spending cuts could "strangle" growth prospects, the head of the IMF has warned.Austerity programmes must be tailored to each economy, Christine Lagarde said, and not be "across the board".
The International Monetary Fund has been one of those stressing the need for countries to cut their debts, but some fear this could hit growth.
The correct response to the eurozone debt crisis has been a major debate at World Economic Forum in Davos.
"We are not suggesting there should be fiscal consolidation across the board," Ms Lagarde stressed.
"Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room. They should explore what to do... in order to help themselves.
"It has to be tailor-made."
One of those expressing concerns about the possible implications of fiscal consolidation at the gathering at the Swiss ski resort was US Treasury Secretary Tim Geithner.
He told the annual meeting of political and business leaders on Friday that there was a risk of a recessionary "cycle" from austerity measures.
"There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises," Mr Geithner said.
'Progress'
Crisis-hit countries such as Greece and Spain are implementing deep government spending cuts and raising taxes in order to try to bring down their deficits.
"For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits," Mr Geithner said.
He is one of a number of leaders who have said this week that the deficit-cutting measures have been an important step in addressing the eurozone debt crisis.
Ms Lagarde echoed those on Saturday: "There is work under way. There is progress, as we see it,"
But some see these policies as potentially very damaging. Financier George Soros told the BBC that the fiscal cuts, which Germany supports, could even lead to a "lost decade" of economic stagnation in Europe.
"This German insistence on austerity could destroy the European Union," he said. "This is reality, this is the harsh reality that we need to face.
"It is not written in stone, the future is not predetermined. We determine the future, so it would be well within the possibilities of the authorities to change it."
A document, reportedly leaked to the Financial Times, has suggested that Germany could be asking for Greece to do more, including giving up the financial control of its tax and spending decisions to an administrator appointed by Brussels.
Firewall
Austerity is only one part of the solution, Christine Lagarde said.
She, and others on the panel, stressed the importance of reinforcing what is being referred to as the "firewall", a much-expanded rescue fund made up of funds pledged by eurozone members.
"It is critical that the eurozone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the eurozone so that the financing needs of that zone can actually be met," she said.
The IMF managing director also spoke of the hundreds of billions of dollars of extra funds she wants to raise to support any crisis-hit countries, especially if a economic downturn takes hold.
Holding up her designer handbag she said: "I am here with my little bag to collect a bit of money."
"There will be needs in the eurozone, no doubt about it, but in central and eastern Europe there will be needs as well. And in other countries including in low income countries, including in middle income countries, there will be needs. Short term for some, long term for others."
The UK has been one of those resistant to pledging extra funds for the IMF to help eurozone countries, but there have been indications in recent days that its stance is softening.
"I think there is a case for increasing IMF resources and I think that will also be a way of demonstrating that the world wants to help... solve the world's problems," UK Chancellor George Osborne told the Davos audience.
But, like his US counterpart Tim Geithner, he said any additional help would be conditional upon Eurozone countries demonstrating they were doing all they could do help fellow members.
"There aren't going to be further contributions to the IMF from other G20 countries, including Britain, unless we see the colour of their money, and I think that's a reasonable request."
Debt deal
For the first time in a while, leaders meeting in Davos don't seem to be stalked by the fear that the eurozone might blow up, the BBC's economics editor Stephanie Flanders reports.
But many of the sessions have been discussing what still needs to be done.
"The fact that we're still, at the beginning of 2012, talking about Greece - again - is a sign that this problem has not been dealt with," George Osborne said.
"The danger here is that the tail wags the dog throughout this crisis. In other words, the inability to deal with specific problems with the periphery causes shock waves across the whole European economy and the world economy," he added.
Talks continued on Saturday between the Greek government and representatives of its private creditors, including banks and hedge funds, to renegotiate the terms of the country's debt.
"Further progress was made, building on the understandings reached yesterday on the key legal and technical issues," a statement from the IIF, the body representing the bondholders, said.
An agreement to reduce its debt burden is a precondition for receiving further bailout funds from European authorities and the IMF.
"Concluding the deal that will lead to a more sustainable situation in Greece, I think actually is fundamental to stability in the Eurozone," Mr Osborne said.
Source: BBC
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